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Summary: The surge in house prices was the major story to come out of the State economy this quarter and was in the headlines most recently when the Domain Group reported that Sydney's median house price had “smashed through the magic $1 million mark” for the first time following growth of 8.4% over the June quarter.

A cocktail of supply and demand factors have driven house prices to these record levels – the most notable of which is the severe shortage of housing in the Sydney region. The low interest rate environment, relatively strong population growth and growing appetite of investors have only exacerbated the housing supply imbalance in Sydney. Based on the latest set of data, none of these factors appear to be abating anytime in the near future.

The supply response currently underway should make up part of the deficit in housing, although there is still some way to go before the housing deficit is completely rectified – with a shortfall of 40,000 dwellings forecast for NSW by June 2018.

So while some economists and segments of the media float the idea of a housing price ‘bubble’, it seems unlikely that prices will ‘burst’ or even slow significantly in the short to medium term until the aforementioned fundamental supply and demand variables change.

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